Fletcher Building profits up on NZ pickup

Fletcher Building, the biggest company on the NZX 50 Index, posted a 1 per cent gain in first-half profit as home building and Canterbury reconstruction in New Zealand made up for declining Australian earnings. The stock fell on the results.

Fletcher reiterated the guidance given at its annual meeting for full-year profit of $560 million to $610 million. It sees no improvement in Australian trading in the second half while all of its New Zealand businesses should show gains, underpinned by increased home building, infrastructure projects and continued strong reconstruction activity in Canterbury.

"The pace of new residential construction in New Zealand has improved substantially over the past six months in both Canterbury and Auckland," chief executive Mark Adamson said in the statement. "By contrast, in Australia, weak market conditions have continued in the residential and commercial construction sectors."

The biggest deterioration came from Crane Group, the Australian pipe manufacturer and distribution company acquired in early 2011 with the aim of diversifying Australian earnings.

Fletcher shares fell 3.3 per cent to $9.01, having gained almost 40 per cent in the past year. The stock is rated a 'hold' based on the consensus of 11 analysts polled by Reuters, with a median price target of $8.75.

First-half profit just missed First NZ Capital's forecast of $147 million while the unchanged 17 cent interim dividend declared met expectations. The dividend reinvestment plan will be in effect for the payment.

Morningstar Equities analyst Nathan Zaia said the result was " slightly below our expectations, but not alarmingly".

"Earnings reflective of well publicised themes - offsetting improving construction activity in New Zealand- bouyed by Canterbury rebuilding activity - Australian residential and commercial activity is still relatively weak. Sticking to guidance management expects the recovery to pick up pace in the second half, cost cutting initiatives will help in Australia. "

Zaia said that with top-line growth at the mercy of construction activity, the only thing in management's hands was its cost base - so firstly sizing the business in response to demand and getting it to run as efficiently as possible was crucial.

"The softness in the Australian market was clear in the Crane business - and while market conditions were far from accommodating it was the major disappointment for us. Crane as a separate listed entity failed to excite and so far were yet to see any signs that it's a better business under the Fletcher stable.""

Fletcher's Adamson said weak conditions in residential and commercial construction in Australia led to a 12 per cent decline in earnings from operations across the Tasman while in New Zealand, rising residential building activity, especially in Auckland and Christchurch, lifted local earnings by 31 per cent.

Sales fell about 15 per cent to $1.1 billion, still the biggest Fletcher business by revenue, while reported earnings dropped 26 per cent to $39 million.

Operating earnings from Crane's pipeline business rose 7 per cent to $31 million while at the distribution business, earnings tumbled 59 per cent to $9 million, reflecting the weak Australian residential housing market.

By contrast, Fletcher's construction business showed the strongest gains during the first half, with sales rising 18 per cent to $613 million and earnings jumping 48 per cent to $37 million, due to rising home sales and more recovery work in Canterbury.

Its construction backlog fell to $1.19 billion as at Dec. 31, from $1.2 billion a year earlier. That excludes a $550 million contract which was delayed and won't have an earnings impact until 2014, it said.

Building product sales fell 5.1 per cent to $701 million and earnings declined 13 per cent to $56 million. The decline was driven by a 54 per cent drop in earnings from insulation, excluding a year-earlier gain from the sale of a flooring business. Australian glass wool volumes fell and margins shrank while volumes were flat in New Zealand.

Earnings from roll-forming, metal roof tiles and coated steel fell 24 per cent, New Zealand coated steel earnings were flat and roof tile volumes rose 8 per cent of increases in Europe and Africa, it said.

Infrastructure product sales rose 4.3 per cent to $711 million and earnings climbed 14 per cent to $72 million on a 3 per cent increase in earnings from cement, concrete and aggregates, a 7 per cent decline for concrete pipes and products and a 30 per cent gain in steel earnings.

Distribution sales rose 9.6 per cent to $424 million, leading to a 13 per cent gain in earnings to $17 million. The company said trading at its PlaceMakers outlets began to improve in the second quarter, led by Auckland and Christchurch.

Sales from laminates and panels rose 4.3 per cent to $711 million and earnings jumped 21 per cent to $51 million. Excluding significant items, year-earlier earnings were $63 million. Operating earnings at Formica fell 12 per cent to $23 million and earnings from Laminex dropped 24 per cent to $28 million excluding items.